Good morning, everybody, welcome to those in person and online to Challenger's 2023 results briefing. I'm Mark Chen, Challenger's General Manager of Investor Relations. We're coming to, to you here today from our Martin Place head office in Sydney. Before we begin, I'd just like to acknowledge the Gadigal people of the Eora Nation, traditional custodians of the land on which we're hosting this event today, and pay my respects to elders past, present, and emerging. Today's presentation will be followed... sorry. Today's presentation will be provided by our Chief Executive Officer, Nick Hamilton, and Chief Financial Officer, Alex Bell. It will be followed by a Q&A session, you can ask a question in person, via the online portal, or via the telephone. I'll now pass over to Nick to get us underway.
Thank you, Mark, good morning to everyone, to those who have joined us in the room, and also welcome to everyone online. This morning, as Mark noted, I'm joined by CFO, Alex Bell, to deliver Challenger's 2023 full year financial results. Challenger closes FY23 in great shape, with significant growth momentum as we enter the new financial year. Our performance reflects a near 30-year journey that has seen us build a leadership position in guaranteed income for retirement. As we look ahead, Challenger is now ideally placed to meet the growing demand for guaranteed income and retirement solutions. This year, we've made considerable progress in executing our strategy. Annuity sales are at a record high. Growth in new channels has delivered early wins, including partnerships with Aware Super and Telstra Super.
Funds Management has executed its diversification strategy with new global alternative and real asset investment capability coming online. Our relationship with MS&AD will now move to the next stage. We have progressed our strategic relationship with Apollo. We have achieved all of this in the service of our purpose: to provide customers with financial security for better retirement. Today, Alex and I will cover the key drivers of our FY23 result, how we are broadening our customer reach. Our outlook. In 2023, the team applied an absolute focus in executing our growth strategy. Pleasingly, we're seeing the results of this in our financial performance. Group normalized net profit before tax increased to AUD 521 million in the top half of our guidance range. Statutory net profit increased by 13%.
Group assets under management reached AUD 105 billion, reflecting growth across our business. Challenger Life delivered a standout performance, with record annuity sales contributing to overall sales of AUD 9.7 billion. Notably, we've seen significant growth in retail annuities, which reflects the attractiveness of our offering and the demand for guaranteed income. Our capital position continues to remain strong, with Challenger Life holding 1.59 times the minimum regulatory requirement. Group return on equity was up 80 basis points to 12.7%. Reflecting confidence in the business, the board determined a fully franked full-year dividend of AUD 0.24 per share, an increase of 4% on last year. This result underpins the strength of our business and provides an excellent platform as we look to capture the significant opportunity in Australia's burgeoning retirement income market.
In 2023, we achieved more than just a strong financial performance. Providing Australians with financial security in retirement has never been more important, particularly given economic, policy, and demographic shifts. This year, we made AUD billions in payments to our customers, providing them with guaranteed income and the confidence to spend their savings. We have a proven track record of developing long-term relationships with super funds. Australia's top 25 funds are clients of Challenger. We will build on this strong foundation as we seek to support funds meet their members' needs in retirement. Underpinning our business is a talented and a diverse team who are proud to work for Challenger. This year, we progressed our community engagement and formed a partnership with ATSE to support indigenous leadership in STEM. I'm particularly passionate about this initiative, which reflects a wider commitment to investing into knowledge and innovation.
We remain passionate advocates for better outcomes for all Australians in retirement, and it is encouraging to see the progress currently underway. As an industry, it's critical that we build a resilient retirement income system on par with our first-class accumulation system. At Challenger, we support customers to build their wealth and to spend their retirement savings with confidence. We are the country's leading guaranteed retirement income business, and we will continue to deliver for our customers and invest in our brand to maintain our position. Over the last 30 years, we've continually adapted to the needs of our customers, developing a unique and leading suite of guaranteed income solutions. We are one of Australia's largest active managers, with a platform of contemporary affiliates and our leading domestic credit platform, Challenger Investment Management.
The business has built a reputation for its investment capabilities, with market-leading positions across equities and fixed income. The strength of our business, supported by demographic tailwinds and regulatory shifts, presents a significant growth opportunity. Our superannuation system is forecast to triple in size over the next two decades, and whilst Australians are retiring in record numbers today, it remains the case that financial uncertainty at retirement is only worsening. The proposed Objective of superannuation, Quality of Advice Review, and Retirement Income Covenant have the potential to transform retirement outcomes for Australia's aging population, and Challenger has the potential to play a key role in meeting this important societal need. We closed the financial year in a position of real strength, with momentum across our key customer segments. In FY23, our sales team conducted over 10,000 advisor meetings, and quotation numbers are up over 50%.
With the normalization of interest rates, our customers are receiving the most attractive rates in a decade. The demand for guaranteed income drove record annuity sales, particularly longer duration term and lifetime sales. As we begin FY24, our momentum across a broader range of channels, longer tenure business, and a declining maturity rate will help drive further growth. Record annuity sales were driven by strong performance across our distribution channels. Growth in the retail channel has been exceptional, with sales up 53% and weighted towards longer duration business. Japanese annuity sales also delivered, up 20% and significantly exceeding the agreed annual target. I'm delighted to announce the broadening of the relationship with Mitsui Sumitomo Primary, that allows us to now look to FY24 and beyond with confidence. As previously flagged, institutional term tapered off as we maintained our disciplined approach to pricing.
It's worth noting that Index Plus sales reached AUD 4.2 billion in the year, reflecting the value of that proposition to our institutional clients. For our core advisor-led market, we will soon go live with annuities in-platform. Netwealth will be the first to launch in-platform term annuities, which opens up a larger market of superannuation and pension stage monies with a far enhanced advisor experience. Through Retail Direct, customers can now access our term annuity range online, further enhancements are planned over this coming year. What is important is that we continue to make it easy to do business with Challenger, FY23 has been an exciting year to better position our business towards our customers, the results are extremely pleasing. As outlined at Investor Day, we have been very active this year with our institutional clients.
In FY23, we have successfully executed on new institutional partnerships that include a defined benefit pension de-risking and retirement income solution. TelstraSuper is the first fund to launch a comprehensive retirement income solution in partnership with Challenger. We will integrate the lifetime income component into their retirement offering, which allows TelstraSuper to issue a lifetime product. Members will benefit from this complete retirement approach via TelstraSuper's retirement advice capability. The relationship will generate regular lifetime annuity sales for Challenger and is expected to commence later this half. This partnership is a great example of how Challenger will work with super funds to meet their members' needs in retirement. As was highlighted at Investor Day, the defined benefit market represents a significant growth opportunity for our business. Last month, we announced a major partnership with Aware Super, the largest defined benefit buy-in in Australian history.
Under the agreement, we provide a group lifetime annuity policy to the value of AUD 619 million, noting this will contribute to our FY24 Q1 lifetime sales. This partnership reflects our unique capability to deliver simple solutions to very complex problems. The agreement builds on our long-standing relationship with Aware Super, who we have provided balance sheet solutions to for a number of years. Looking ahead, we expect more funds and sponsors will de-risk their defined benefit plan liabilities in the coming years. Leveraging our retirement and investment expertise, we are ideally positioned for this opportunity. A key focus for Challenger is making it easier for financial advisors, institutions, and customers to do business with us. Customers, including retirees, are showing an increasing preference to engage digitally and invest directly.
Income-seeking customers can now purchase our fixed-term direct annuity from our website in a matter of minutes. This simple and straightforward process allows us to target growth from a new direct digital channel. As we build out this channel, we expect our offering to compete with the term deposit market, with our focus on longer duration business. We are now in a test and learn environment, using technology to build a more customer-centric business and deliver a seamless experience. Funds Management is a leading investment and multi-affiliate platform that provides our clients with access to a broad catalog of highly regarded investment products. In what has been a more challenging market, we've continued to invest for growth. We've expanded our offering, adding new alternative investment strategies to meet growing client demand.
This year, in Fidante, we broadened our relationships with alternative asset manager Proterra in Singapore and Resonance in London, as well as launching local affiliate Cultivate's new food and agriculture fund. We also focused on offering investors a wider range of structures, with the team launching new active ETFs, UCITS, and access fund structures. Challenger Investment Management has secured two new domestic private lending mandates, sorry, one with our strategic partner, MS&AD, and the other with a global insurance company. While 2023 was a difficult year for the funds management industry, our team's efforts to expand our capability and to stay close to our customers sees us well positioned for 2024 and beyond. Challenger has a proven track record of building strategic partnerships that, that support the delivery of our strategy.
The Challenger Investment Management mandate I referenced is a great example of the strong relationship we have developed with MS&AD over many years. Our long-term annuity reinsurance agreement with MS Primary has been highly successful to date, and we have worked collaboratively, which we've worked collaboratively on over many years. As I mentioned earlier, we are expanding our partnership and will commence reinsuring Japanese yen-denominated annuities later this year, which will further diversify the product range that we reinsure. Our partnership with Mitsui Sumitomo Primary will now look beyond the original July 2024 agreement date to an evergreen relationship. I would like to thank our partners at MS&AD. We are privileged to continue supporting them, providing their customers with financial security for retirement. With Apollo, we have started to identify ways both businesses can create shared value.
For our balance sheet, this includes investment opportunities across private equity alternatives and credit, supporting our future growth and margins. We've also agreed to form a new distribution partnership, under which Fidante will bring the Apollo Aligned Alternatives, AA A, capability into Australia. This responds to client demand and will be launched in the coming month. Artega Investment Administration, our joint venture with SimCorp, is off to a positive start. Artega has won several new clients that will transition to its platform in the first half. Through platform improvements, Artega continues to enhance its offering to both existing and new clients. Through our recently announced partnership with Elanor Investors Group, our life company will have a broader and deeper asset management and transactions partner in real estate. In addition, Fidante will bring Elanor's compelling real estate proposition to retail and institutional customers.
It's been a year of significant achievements right across our business. We have successfully executed our strategy, expanding our customer reach and delivering a very strong financial performance. I will now pass to Alex, who will provide the detail of our FY23 result.
Thank you, Nick. A very good morning, everybody. Challenger has delivered a strong result, which really demonstrates the progress that we are making in executing our strategy. Our efforts to build a more customer-centric business is translating into strong financial results and provides a platform for accelerating growth. This has been a tremendous foundation for my first year as Challenger's CFO. I'll now take you through our financial performance for the year. Starting with the group view, we delivered normalized net profit before tax of AUD 521 million for the year, an increase of 10% on last year. Pleasingly, the result was in the top half of our earnings guidance range and was driven by strong growth in life earnings, partially offset by lower earnings from Funds Management. I'll cover the drivers shortly.
Normalized net profit after tax was AUD 364 million, an increase of 13%, which is higher than the increase in pre-tax earnings due to a lower effective tax rate. Statutory net profit after tax was AUD 288 million, also up 13%, and includes an investment experience loss of AUD 68 million and one-off items of AUD 9 million. Pre-tax return on equity was 12.7%, which was 80 basis points up on last year. I'll provide some more detail on both investment experience and ROE in a moment. I'd like to turn now to the earnings drivers. Income was AUD 842 million, an increase of AUD 65 million, or 8%, driven by very strong growth in Life earnings, partially offset by lower Funds Management, fund-based fee income. Life income or normalized Cash operating earnings increased by 12%.
The key drivers here were a 22 basis point expansion in the COE margin and a 3% increase in average investment assets. In Funds Management, net income decreased by 7%, driven by lower average funds under management. Expenses were AUD 318 million, representing an increase of 5.7%, which was within our expense guidance range of 5%-6%. Excluding the bank, expenses increased by only 4%. The increase in expenses was largely due to a high number of FTE in our investment operations business, Artega, and some inflationary pressures. The group cost-to-income ratio was 37.7%, an improvement of 100 basis points on last year, with revenue growth significantly outpacing expense growth and reflecting our cost discipline.
Pleasingly, we expect to continue to capture scale benefits with the cost-to-income ratio improving further to between 35% and 37%, and accordingly, we're communicating this as a medium-term target going forward in FY24. Turning to ROE. This chart shows the contribution to ROE from Life and Funds Management. For the group in aggregate, ROE increased 80 basis points in the year to 12.7%. Life's ROE increased by 200 basis points to 15.1% and was driven by stronger Life earnings. With Life's portfolio predominantly in fixed income, its ROE is correlated to the RBA cash rate over the long term. The investment portfolio is 76% weighted to fixed income, and this year's increase is directionally consistent with the 290 basis point increase in the average daily RBA cash rate.
Accordingly, it will take time for changes in the RBA cash rate to be fully reflected in earnings and ROE. In Funds Management, the ROE decreased by 10 percentage points to 21.7%, driven by a decrease in fund-based fee income and some higher expenses. As we look to FY24, we expect the group ROE to be below the through-the-cycle target. The gap will close over time, though, and the life ROE is expected to continue to increase. Looking at the life business performance in more detail, I'd like to take you through the key components of the result in the following few slides. At the start of the year, we outlined our strategy to improve the quality of the book by focusing on longer duration annuity sales.
We executed on this strategy, achieving record annuity sales of AUD 5.5 billion, underpinned by very strong retail sales. Retail annuity sales increased by more than 50% to AUD 3.6 billion. The largest contribution to the increase was from domestic retail new business sales with a tenor greater than 2 years, which almost doubled. We will look at sales in more detail shortly. It's clear our annuity market messages are resonating with retirees and advisors. There is rising demand for both guaranteed income and true longevity protection, which safeguards against the very real risk of our customers running out of money in retirement. This strong sales result translated into lifebook growth of 5.2% for the year. This was moderated by the higher maturity rate this year of 33%.
Average investment assets increased by 3% to AUD 23 billion. Pleasingly, the COE margin expanded by 22 basis points to 2.82%. The second half margin was even higher at 2.8%. The higher cash operating earnings and disciplined expense management delivered a 14% increase in the life EBIT to AUD 541 million. Turning now to the drivers in the expansion of the COE margin. Return on shareholder funds was the biggest contributor, up 25 basis points, reflecting higher yields in fixed income and alternatives. The product cash margin expanded by 7 basis points, reflecting our disciplined pricing approach and the benefit of higher yields on investments, particularly fixed income. Normalised capital growth was 10 basis points lower as a result of our reallocation from equities and property into alternatives, with alternatives attracting a zero normalised capital growth assumption.
This slide provides some additional detail on the sales composition and tenure. Total life sales was AUD 9.7 billion and stable on last year. However, composition has tilted towards higher value retail and longer duration business. The life business is experiencing exceptionally strong sales. The growth in longer tenure retail sales is expanding our investment universe, enabling us to deliver a higher margin. We are seeing increasingly strong demand for retail sales, with advisor quotations up 59% on last year, a testament to the benefit of our strategy to diversify sales and our efforts to broaden access for retail customers. 74% of new retail annuity sales were for durations of two years or greater, compared to just 50% last year. In dollar terms, this represents a notable 82% increase on last year.
The increasing tenure of new business sales means that the average tenure of new business is now 5.8 years, compared to 4.9 years in FY22. In the institutional channel, reflecting asset allocation decisions as rates have normalized, new business term annuity sales were lower, and the investment rate was also lower at approximately 50%. Importantly, as Nick mentioned earlier, we are deepening the relationships with institutional customers, particularly superannuation funds. We're providing innovative, guaranteed income solutions, and we see significant opportunities to accelerate these activities and generate additional sales and revenue. Looking now at maturities. Our focus on generating longer duration sales will benefit the maturity rate in future. Total annuity maturities this year were AUD 5.1 billion or 33% of the undiscounted opening annuity liabilities. This was higher than the 28% maturity rate in FY22.
In the years of ultra-low interest rates, we generated significant shorter duration sales. That drove our maturity rate higher. Now, the benefit of increased longer duration sales is starting to emerge in the maturity rate, which will start declining from next year. In FY24, annuity maturities will be down AUD 0.8 billion, representing 26% of opening annuity liabilities. This will help support stronger book growth. Continuing with a bit more color on Life net flows and book growth. This chart shows Life net sales of approximately AUD 0.9 billion for the year across all channels. This delivered total book growth of 5.2% and retail annuity book growth of 8.6%. Considering the AUD 1 billion of institutional term annuity outflows we experienced in the year, this is a very strong result.
At AUD 1.4 billion, retail and MSP sales accounted for the majority of total Life net flows this year. Let's now look closer at the Life investment portfolio. There has been no change to our risk appetite, and we continue to seek to match our assets and liabilities. Fixed income represents 76% of Life's investment portfolio, up 1% from last year, and within the fixed income portfolio, investment grade represents 77, which is above our target of 75%. The weighted average credit rating of the portfolio is A. In the first half of the year, we exited our low beta equity portfolio, reducing our exposure to equities by 3 percentage points to just 1% of the total. We also sold one direct property at carrying value.
The funds received from the sale of the low beta equity portfolio and the sold property were reinvested into alternatives, increasing its allocation by 4 percentage points. That equities now represents 10% of the investment portfolio, comprising primarily of a diversified group of absolute return funds and some general insurance exposures. Alternatives are less correlated to both equity and credit markets and provide a source of liquid capital that improves our financial flexibility. Moving on to investment experience, which represents the fair value movements in asset and liability valuations, as well as new business strain. Overall, we reported a pre-tax investment experience loss of AUD 99 million for the year, of which AUD 39 million was in the second half. Of the AUD 99 million, AUD 87 million was net new business strain, and the remaining AUD 12 million was from combined asset and liability valuation movements.
The asset valuation investment experience was driven by gains in the investment in the fixed income portfolio, offset by property, equity, and alternative valuation movements. As a reminder, it's Life's policy to provide for any security that is downgraded below B minus. For property, the AUD 223 million of investment experience loss largely reflects valuation movements. Given the rising inflation and interest rate environment, all of our properties were independently valued at June 30, 2023. Most of the revaluation loss was in the domestic office portfolio, which was revalued down by 7%, driven by cap rate softening. The retail portfolio revaluation loss was only 3% and was almost entirely offset by valuation gains in the industrial portfolio, driven by higher market rents. Pleasingly, the portfolio has an occupancy rate of 93% at June 30.
Finally, the equity and infrastructure, which now represents only 1% of Life's investment portfolio, recorded investment experience losses of AUD 36 million. Turning now to Funds Management. Funds Management EBIT was down 26% to AUD 62 million for the year. The decrease in EBIT was due to lower average FUM, which was down 9%, as well as higher expenses. Closing FUM for FY23 was AUD 98.4 billion, with the second half seeing AUD 1.4 billion of net flows and a particularly strong close to the year in the fourth quarter. Funds Management expenses did increase by AUD 8 million or 8%, with higher data and investment management costs as a result of higher trading and transaction volumes.
We also implemented a new registry system and had some inflationary pressures. Funds Management total net income margin by 0.4 basis points to 18.8 basis points. This was primarily driven by FUM-based margin expansion following the sale of Whitehelm Capital last year, and redemptions from lower margin fixed income affiliates. Looking more closely at Funds Management net flows now. Outflows for the year were AUD 0.5 billion, primarily concentrated within fixed income and a derecognition in alternatives. Net outflows and client distributions were fully offset by over AUD 7 billion of positive market movements. We closed the year really strongly, with AUD 2.3 billion of net flows in the fourth quarter. With a platform of differentiated fund managers and a diversified model focused on generating alpha, we are structurally very well positioned.
We have a range of investment strategies that appeal to clients through most economic cycles, and you can see this in the chart on the left-hand side, which highlights we've outperformed our peers 10 out of the last 12 quarters in terms of net flows. Our net flows are also underpinned by strong investment performance, with 75% of FUM outperforming over 3 years and 99% outperforming over 5 years. Our own internal capital targets. Throughout FY23, Challenger Life continued diversifying the investment portfolio by increasing its allocation to alternatives. This provides additional financial flexibility, which, in combination with the higher proportion of CET1 in the capital mix, will enable the Life business to operate at a lower PCA ratio. The CET1 ratio is up 5 basis points to 1.16 times, which highlights the capital mix component of this dynamic.
Reflecting the strength of our business and our commitment to shareholders, the board determined a fully franked final dividend of AUD 0.12 per share, bringing the full year dividend to AUD 0.24 per share. The dividend payout ratio was 45% for the year, which was within our payout ratio target, and reflects a 1% increase for the full year dividends from FY22. In conclusion, we have delivered a strong result that shows the momentum built over the last year. In Life, we are uniquely positioned to benefit from favorable economic, structural, and regulatory forces, increase sales, extend duration, and expand margin. We are delivering on our growth ambitions. With that, I'll hand back to Nick, and I look forward to joining you for Q&A. Thank you.
Thank you, Alex. Now turning to the outlook. In FY24, we are targeting normalized net profit before tax of between AUD 555 million and AUD 600 million. The middle of the range, representing an 11% increase from FY23. In setting the guidance range, we have excluded Challenger Bank, which is now expected to complete in the first half of FY24. In FY24, ROE is expected to come in below our through-the-cycle target. Whilst we expect to benefit from continued expansion in Life's ROE, Funds Management's relative contribution is expected to take more time to recover. We continue to remain disciplined on costs. From FY24, we will return to a cost-to-income target. For FY24, we are targeting a cost-to-income ratio of 35%-37%, an improvement on this year.
We are confident in our growth outlook, and to ensure we have capital flexibility, we are extending the dividend payout range. Starting in FY24, we will target a dividend payout range of between 30% and 50%. In periods of high growth and favorable investment conditions, this will provide additional capital flexibility, which will allow us to deploy retained earnings in an ROE accretive way. We remain well capitalized, and we will operate within a 1.3-1.7 PCA range. I'm extremely pleased with the performance in FY23 and the momentum that we are taking into FY24. We are a very focused business and have executed on a range of strategic initiatives that position us for growth, which is reflected in the momentum that we are seeing across the business today.
As a team, we are aligned and energized to deliver our strategy, which will see us leverage our expertise to meet the needs for guaranteed income and active investment management. We have in our strategic partners, MS&AD, Apollo, and SimCorp, the potential to enhance long-term growth. This will support future returns for shareholders. None of this could be achieved without the commitment and energy of the Challenger team, who I would like to thank for their dedication this past year. With that, Alex and I will now be pleased to take questions.
Okay, as a matter of process, we'll first take questions personally in the room. We'll then move to the telephone, and if there's any online questions, we'll also go to those after the telephone questions. Can you please state your name and, and, and where you're representing, as before you ask your questions, any possible grouping, in, in terms of, as many as possible? Let's start with the room. Steve's got the, the microphone.
Thanks. Thanks. Siddharth Parameswaran from JP Morgan. If I could just ask the first question, just around the ROE and just the lag versus the cash rate. Alex, you had mentioned that you expect the Life ROE to improve again into next year. Just wondering if you could give us a profile of when you think the divisions aside, ROE as it brings in us cash.
Mm-hmm. Thanks for the question. Yes, you're right. We delivered today an ROE target of 12.7%, which is up 80 basis points, and we did provide an indication of Life's contribution to that. Fifteen point one percent for the Life business, up 200 basis points, which, if you think about the composition of the fixed income component of the balance sheet, is reasonably well correlated to the 290 basis points you saw as an increase in the cash rate. That cash rate increase was incredibly fast, though, and so it is going to take a little bit of time to fully flow through the whole balance sheet within the Life company. We're really confident in saying that that Life company ROE will continue to increase as we look forward to FY24.
Okay, well, maybe I'll just have a question around guidance then. Just maybe if you could just help us understand the components of the increase in the guidance, you know, about AUD 60 million to the midpoint of the range, just, you know, compositions in terms of just, just what you're expecting in terms of book growth and also just cash operating earnings in the Life business?
Mm-hmm.
Sure. I'm going to just start that one off, and then I'll, I'll let Alex add some detail. You know, in setting the guidance range of AUD 555-AUD 605, with we, we - the midpoint of that, as I noted, is 11% up on what was a strong year in FY23. There's, there's a whole lot of components that go into how we consider that range at any point in time. It reflects the strong momentum we have coming through the Life business and the operating earnings. Cash operating earnings will take off that, but not all components of Life's result are guaranteed, hence the range. You know, that gives us some flexibility around that.
It also allows for the fact that in the course of the year, we will do a lot of investment activity on the balance sheet and fixed income up, you know, and that can provide impacts up as well as down for, for the credit program. Obviously on the fund side, there's variability of outcome depending on where, where, where markets are or where, where flows are. From where we sit today, that feels like a, a, you know, strong guidance to, to bring to market. In terms of book growth, we, you know, we, we don't provide that specific detail other than to say. What we are seeing because of the lengthening maturity rate right now in FY23 is a natural step up in book growth.
you know, AUD 800 million less of maturities, like for like, is equivalent about 6% book growth for the year ahead, given the lengthening tenor of the sales book that we've had. you know, we feel good about book growth as we come into FY24. They're the sort of thought processes that go into, you know, into that guidance. and Alex, I'll see if you'd like to add something.
Yeah, the only thing I'd say is, so, you know, the midpoint of the guidance range gives us 11% profit growth year-over-year, which we see as a really positive reflection of the momentum that we've got in the business this year. We have called out in the analyst pack two items which are sort of new to the year, if you like. One is a AUD 5 million investment into our investment administration platform, Artega. That's the technology investment to bring the Dimension system into the cloud and to ensure we can onboard new clients. That's new. The other AUD 5 million that we've called out is investments into cybersecurity and risk-related projects.
You know, the, the, the compliance requirements are, are only increasing for everybody across the industry, and so there is a step up in that regard.
Okay, awesome. Can we go to Simon in the front?
Hi there, Simon Fitzgerald from Jefferies. I guess my first question is a bit of an extension from Sid's question then on the ROE and that lag. I'm just interested to know conceptually whether it's the right thing to have a variable-based target within a through-the-cycle ROE target. I mean, in a rising interest rate environment, you'll always be chasing it, and in a declining environment, it might certainly serve you well. Just since, you know, conceptually, how you're thinking about that?
Simon, your comments are well made, clearly, as Alex noted, the steepening of rates in such a short period of time and the lag effect on the balance sheet, you know, plays through. You also think about how the ROE target is used within the business. We are very clear that all the business that we write at FY23, FY24, and beyond, that business must meet our ROE target. Whether it be new business on the Life Company, or whether it be strategic initiatives that we may be looking at, it, it anchors the business, it anchors the business in terms of an expected return.
We are gonna see a lag, this cycle, and that is the nature of it, but we're not proposing any changes to the floating rate target.
Okay, that's clear. Second question just relates to the digital, direct sales. Just if you had any comments about how they've been going, maybe month by month, or at least, any early engagement, anecdotes from customers on that? I've got one more question.
Sure. Okay, I can make a start on that. We went live a couple of months ago. Whilst we were doing the build-out, the first iteration of that is for individuals or couples. It doesn't capture people who want to invest via super funds or trusts. It does narrow the range. We talk about it being a test and learn because the team, with the technology that they have, are able to follow and map the customer behavior on it. It is early days. We have seen regular flows going onto that platform. As we do more product development of that direct and more campaigning, we would expect to see more flows.
You know, bringing this back up one level, this is all part of a broader range of, of our focus right now, making sure whether it be the announcement around Netwealth and getting annuities in the platform, or providing online access, and other activities that we're doing in the advisor channel to make it easier to do business with us full stop. We're really confident around the long-term opportunity for that direct channel. It is really early days, and we'll, we'll give it 6-9 months, and we'll give you a lot more color as we go, you know, we go through this initial launch period. The early signs are very promising.
And then just on the Aware Super mandate, just finally, given it's a DB mandate, I understand that it's in a liquid lifetime annuity. Is there anything different in terms of the capital that we should think about that needs to back that mandate? Also, maybe if you could give us some, you know, further guidance in terms of what the new business strain would be like against that. I, I imagine it's gonna be pretty significant.
Yeah, I'm happy to take that one. Thank you, Simon. The way to think about the Aware Super business is just like all of our lifetime business today, it's no different in terms of the capital requirements or what assets we use to back that mandate. It will tend to be longer duration because the lifetime product is, by its nature, longer duration, but no different to the retail and lifetime in how to think about it. There will be a new business strain, which we will record in the month of July. The product went live on the 31st of July, so you'll see that come through in our results that we report at the first quarter.
You know, it is, it, it is lumpy because it's a, it's a big one in one go, but there are a number of other moving parts in the investment experience lines, you know, that can, that can easily compensate for that from one period to the next.
Kieran, just go ahead.
Thanks. Kieren Chidgey, Jarden. A couple of questions, maybe just starting on the annuity sales and sort of from a Japanese point of view, you talked about extending the relationship into yen. What, what does that do to the JPY 50 billion guarantee? Does it alter that, or is it just sort of the mix will, will evolve?
Yeah. Thank you, Kieran, and if, if you've got more questions, I'll, I'll answer that one first and come to the second one. I, this is great news for Challenger. We've, we've, we've had this partnership. We put a quota share in place in 2019. That has a natural run to 2024. That did have a fixed rate. We've always exceeded that rate. I mean, this year was 20% up on the target quota. We feel very confident. I think one really positive reflection on doing yen-denominated annuities is it diversifies the sales mix for, you know, for our exposure in Japan. You know, we no longer are exposed to the, to the shifts in currency, that we think will be very positive....
We don't have a guidance as to what sales look like. We'll, we'll provide some more color next year, but it should be seen very positively to support long-term Japanese lifetime sales.
Okay, just to be clear, does the guarantee exist anymore under this promotion?
The guarantee will roll off.
Okay.
In FY24 and become an evergreen relationship, but what we're not calling out is lower levels of reinsurance play there.
Okay, the economics around the relationship, the margin you make on those products, I presume, is unchanged?
Correct. Absolutely correct.
Okay. Also on the sales side of things, the retailer sales, you know, very good growth year-on-year, in terms of domestic retail annuities, but lower in second half than first half. I'm just wondering if you can talk to the dynamics around that seasonality, you know, and how you're thinking about that on a go-forward basis?
Sure. Okay, coming out of, coming out 18 months ago, of a very low rate environment, we initially started writing quite a lot of shorter-dated annuity business in retail. We've worked as a team very hard to push the tenure of that retail business out, and also the volumes have gone up materially. What we are seeing as we leave FY24 is continuation of these positive trends, more flow going into the longer term business, and strong sales within the lifetime care family of business, and that has continued through July. What we are trying to do is shift that, continue to shift the mix. There is, there is undoubtedly competition about 1-year term annuity. Now, that's an annuity in name, really. Where we're trying to, to build our business is in that 2-year plus annuity.
We're seeing very strong 3-year sales, 5-year sales, and our mantra internally very much is AUD 1 in 3 years is worth a lot more to us than AUD 3 in 1 year, and that just builds out longer. That's how we've got the sales team lined up. They're really excited about the opportunities, and I think the way, the way that we've asked the team to focus this year is to broaden the number of financial advisors writing annuities. You've seen a real increase in the number of advisors writing annuity for the first time with us, so the first time in the last 24 months, and that is allowing...
Sorry, 12 months. That gives us a really good platform to work with those advisors to write more business and become multi-writers, and that momentum we take into this year. We feel very good about retail annuity sales, you know, for FY24.
Thanks. Just on the institutional side, you know, great to see the Aware contract coming through, and I know that sort of that bulk business on the DB side is going to be very lumpy, but you seem fairly confident on the opportunities ahead of you. How do you approach that from a guidance point of view? Do you assume you're going to have any success through the course of 2024, or is that upside risk to your midpoint?
It's, it's definitely upside. So it, it is episodic. We work very hard to build the relationships, and this will be across not just funds, but also the sponsors, the corporate sponsors of these plans, in many cases, and building those relationships takes, takes a period of time. What the Aware Super... This was, this was a very contested process. This was not Challenger as the party of one in those discussions. We were able to demonstrate a clear leadership position relative to other parties in that, in that transaction, and that is a real calling card for us with other large schemes that are in, in market right now.
The environment's good because a number of them are really well-funded, and on the basis that they'd rather not have this risk, because it doesn't match their business model, but it works for us, then the opportunities we see is, is, is really prospective. There is a, there is a pipeline, and you can rest assured we're working as a team very, very hard, to, to, to land, more of these.
Thanks. Cheers.
Thank you. Good morning, Andrei Stadnik from Morgan Stanley. Can I ask my first question around the dividend? You're reducing the dividend payout range, and at the same time, in fact, you actually have more diversity within your capital base, you have more flexibility within your capital base, and you're also trying to tilt the business mix towards more stable earnings. What, why the cut in the dividend range?
Okay, thank you. Yeah, thanks, Andre, for the question. Yeah, our dividend range at 45%-50% was a tight, a tight range, and what we've done here is extend the range. What we haven't said is an expectation of where we are in that range. It is set to our guidance, and we are in a strong growth period, and the momentum we take from FY23 to FY24 in terms of remix sales, longer dated business, you know, we are a balance sheet business, and we do require capital to, to drive profitability. You know, to be really clear, the decision around the use of capital will be taken through the ROE lens and the shareholder lens.
To the extent we can deliver and drive returns in excess of our ROE, then that, that is an that can be efficient use of capital. To the extent we can't, we'll return it. That just, just gives us optionality to grow the dividend, to decelerate the growth or at times, to take some of that, that retained earnings for capital growth in the balance sheet.
Thank you. My second question, I wanted to ask around the Apollo joint venture. Can you tell us a little bit more about, like, some of the products coming to market? You know, how long will it take for those more capitalized products to actually, you know, make a meaningful impact on lightening the, the capital mix of the business?
Yeah, thanks, Andre. I'll just break up the sort of initiatives with Apollo into a couple of buckets here. One is that there's a lending joint venture partnership, where the team are looking at different non-bank lending platforms. We are a really large originator ourselves of lending to support the balance sheet and Challenger Investment Management. That is, that would be an extension to what we have today. There is no new news around that, the teams are looking at different opportunities, will continue to do so. I think about the other, you know, Apollo is a leading investor in credit globally, and their capability to produce very attractive risk-adjusted returns is something that, for our investment team, is an area of interest.
We've had a team in New York recently, and there's a lot of discussions around different investment opportunities that will support the Challenger Life balance sheet. I made the comment about that could be private equity, it could be alternatives, it could be credit. And we've already started on private equity, and the team are working on those other opportunities. With the Apollo Aligned Alternatives, which is the product, if you like, the Apollo Aligned Alternatives is their flagship global alternatives capability. It is a $20-plus billion pool of diversified alternatives that we will have exclusivity to in the domestic market here.
This is where we're seeing enormous growth across, whether it be the high end of the retail, the high-net wealth market, or in family offices through to institutions, in demand for these uncorrelated, you know, private market, assets. So that's, that's gonna be in market over the next month. The teams have already been out pre-marketing. We've had teams down from Apollo in the field, with our distribution teams, and there's a, there's a really strong sense of excitement in the business around, around bringing that into market and the opportunities to open up new doors. There's a number of parts to that relationship, and I think what's really pleasing is that we're finding ways to work together that are really meaningful for the Challenger business, and for our shareholders.
I might go to Scott or Scott first, then go to Anthony. Did you have a... Oh, sorry, Anthony. Yep.
Thank you. I'm Anthony Roberts, CLSA. Can I follow up on an earlier question around annuity sales? As you go towards every year, Q4 annuity sales slowed across most categories except for Lifetime. Just wondering, is that, you know, more reflection of market dynamics, you know, increasing competition around term deposits and short-term end, and hence you kind of push towards the longer end? Or is it, you know, or, or is it really a conscious decision on your part to, you know, as you talk about shifting the shape of your book, the tenor of your book?
Yeah, we, we, we definitely have a priority on raising lifetime monies, and that is a key focus of our distribution team. In the two plus, though, what you can't see is the three to five and some of the strong growth that we've been getting in that part in the advice channel. Whilst the number, I mean, they move around, and there's been always a little bit of movement, depending on activity in market and the busyness of advisors, et cetera, but I wouldn't read too much into, into those volumes. At the short end, we're definitely, we're, we're definitely not trying to focus the sales team in that one year, that one-year business. We're trying to get all the attention and focus around the two plus.
Now, clearly, at different points, you know, the rate, the, the, the curve's been moving around, and if you look at our pricing over the last 3-6 months, you can see that, you know, that effect. So you've got reasonably flat pricing, out 2-5 years, so the team adjust how they position that, sales story to market. You know, it's, there is very strong momentum, a lot of focus on that lifetime sales. We're talking about bringing annuities in platform with Netwealth opens up a huge amount of, of advisor's client monies, which today we couldn't access, so that conversation, you know, also, also moves as well for us. There's, you... I don't want you to hear from us that there is some great deceleration in sales happening, on the retail book.
That's not, that's not what's coming through.
Thank you. Just another question, just on your dividend payout ratio. I'm recognizing, you know, your comments earlier around your flexibility, and your, your, you know, your desire to invest capital from an ROE lens. I'm, I'm, I'm just wondering, can you talk a bit more about, you know, how do we interpret your, the change in your dividend payout ratio? Does that mean really in the short term, the next couple of years, we should be expecting towards the lower end of that new range, 30%-50%? Is that how we take it?
No. I, I mean, that's not what's being signaled today. We've come in at the bottom end of the range, 45%-50%, and we are, you know, we are expecting strong growth in earnings over this next 12 months, and it is a range that will clearly go with those earnings. It is about providing us capital flexibility, and when we talk about, when we talk about the need for capital, it is only where there is very strong growth that we, you know, where the capital position we have today and the investment opportunities line up to use that capital.
We're very clear that, you know, to the extent that, it decelerates or it doesn't increase, that is because there are opportunities that directly are really creative to, to the Challenger business, and it's a, it's an effective use of shareholder capital. That is the lens through which the board will ultimately make the decision around the dividend.
I think just, just to add to that, we're just trying to make sure that we've got as many capital options as possible. As Nick talked about before, the other life company is a capital-intensive business. We've got AUD 40 million sitting in the bank, which we hope to get back when that closes. The widening of the dividend payout ratio gives us optionality to potentially use that if we think that there are things that will be ROE accretive for, for shareholders. We've got the asset allocation on the balance sheet, too. Just making sure that we're giving ourselves the, the maximum optionality with regards to capital.
Okay, thank you. We might take some questions from the call phone now. Operator, can we go to the first call? Thanks.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Matt Dunger with Bank of America. Please go ahead.
Yeah, thank you, Nick and Alex, for taking my, my questions. If I could just ask first on the guidance, can you talk about to what extent you're factoring in some of these partnerships you've called out, Telstra, Netwealth, and, and others, into guidance for net book growth? What's the margin and, and ROE on these? Should we consider these similar to the back book?
Thank you. The guidance is built up clearly for our expectations of sales, and our expectations sales will be adjusted based on the partnerships. I mean, they'll be, to be clear, entering a partnership with the superannuation funds is about building flow over time. That will take time to come on, but it will become a steady contribution to lifetime sales. Netwealth, we believe there is, you know, strong interest and good excitement around that initiative on the platform there, so that will feed into term sales through the years. We take a view on retail sales and institutional sales clearly more broadly when we're thinking about when we're thinking about guidance.
All of the business is priced to meet our ROE, so that, that, that is, you know, absolutely a definitive part of how we think about, you know, setting up, guidance, for this year. Those partnerships are subsidiary, factored in through, our sales. You know, what we think our sales plan looks like.
No, that's all good.
Thank you very much. If I could just ask a follow-up on costs and noting the step up in FTEs in the heart, are you able to talk about where those FTEs have gone? Does that include these, these, these two factors you've called out around the step up, up in costs, or is there more FTE increases to come?
Thanks for the question, Matt. You know, the cost-to-income ratio in FY23 was 37.7%. What we're moving to is guidance around the cost-to-income target going forward, with the range being lower than that. 35%-37% for next year. This is a transition year, so, you know, I, I, hope to be able to lower that range in, in future. I did talk today about needing some extra FTE in the investment administration business, Artega. Those have come online in FY23. We have built into our guidance and that cost-to-income ratio, the, the, the full year impacts of those FTE.
Other than the, the investment in, in the technology uplift for Artega, we're not calling out a big increase in FTE anywhere else.
Thank you very much.
Your next question comes from Nigel Pittaway with Citi. Please go ahead.
Good morning, guys. Just first of all, just thinking about COE for next year. I mean, aside from the increase in interest rates on the shareholder capital and obviously the flow through the impact of the change in asset mix on normalized capital growth, is there anything else we should be thinking of as key drivers in terms of that COE margin into 2024?
Thanks for the question, Nigel. Just as a reminder for everyone, we have seen the COE margin tick up, finishing the year at 2.82%, the second half's even higher at 2.88%. You're right, that seasoning of the interest rate is something that we will continue to see come through. There also continues to be a drag in the interest expense line from the addition, the higher subordinated debt costs. That's worth about 4 basis points in FY23, and that persists into FY24. Those are probably two other things to call out. Yeah.
Otherwise, you'd be expecting margin expansion because you're writing longer dated sales, is that?
That's right, Nigel. We, the business that we're writing today is very much accretive to our COE margin.
Mm-hmm. Okay, thanks for that. Second question then is on asset risk. Obviously, you've had to take the mark on the property this period. Presumably, you're expecting to have to take more next year. Then also on fixed incremental charges. I was just wondering whether those two entities are still paying their coupons in full. How you're feeling about fixed incremental moving forward?
Okay, well, I might make a start on that, Nigel, and I'll. Alex can build on it. What we, what we have done, what we did at Investor Day was provide a bit of sensitivity around capital to any revaluation of the property book, and we, we used the 5% assumption. As it was, that's what came in, but it's very much barbell, and I think that the underlying that revaluation, there's a very strong story, the defensive nature of that property portfolio.
You know, half of that book is office, and half of that is multi-tenanted office, which is where you've seen the double-digit cap widening or the double-digit reduction in value on those assets and most of the cap widening. What we have in a single tenanted office, which for us is government tenanted, they've had a very different experience. Then the retail book, where we probably took the marks through COVID, you know, that was just down slightly, industrial was up, and Japan was there or thereabouts flat. In the whole, in the whole piece, we've seen significant revaluation in the office portfolio, multi-tenanted, but the rest of the book is proving very resilient.
As Alex noted in her comments, leasing rates are at 93%, and we're pretty pleased with some of the early activity that we're seeing around the Elanor relationship and opportunities around those assets that we have. I remember saying at the half that one of the ways to meet the cap rate expansion is to make sure we're running our assets as efficiently and effectively as possible, and maximizing the rental income across there. You know, it's very pleasing early signs, early signs there. We did revalue the whole book at this half, and, you know, as to what happens in the future, well, we'll, you know, time will tell. We definitely took significant marks on that, on the multi-tenanted office, office portfolio.
On fixed income in the first half, we did call out 2 names that we had provided for. In the second half, it's still quite a different experience, you know, across, across the book. Lender for the year was 22 basis points. We have a 35 basis point allowance in the normalized framework for credit losses. Those 2 are not paying their coupons. Similarly, we have a strong experience in recoveries as well. You know, the team will work now to seek recoveries around those names. Do you want to add anything to that?
I was just gonna say that what we have tried to do with the, with the property portfolio at this half is give the market some comfort around those valuations. Ordinarily, we would have only externally revalued 50% of the book. That's our policy. We revalued the whole portfolio to have independent valuations. We're really comfortable with how that's performed. The diversification, as Nick said, particularly with having so many of our, our buildings tenanted by very sticky government tenants, means that our portfolio is performing well. Nick's right, the coupons are no longer being collected on those two fixed income instruments that are in default. We have a very strong track record of recoveries.
In, and in total, we're talking about 22 basis points for the year, which is, you know, below our 35 allowance.
Okay, thank you very much for that. Maybe just finally, I mean, just in terms of the sort of online sales, and obviously the risk of doing that is always that you sort of end up with channel conflict issues. I mean, can you just sort of make a few comments to that, how you intend to manage that and moving forward?
Yeah, thanks, Nigel. What we're working on across the whole business is simplifying and making it easier to do business, so we get better advisor experiences as much as we make available an opportunity in a new channel. It is worth noting that 85% of Australians don't receive financial advice today. And, you know, we have an extremely close relationship with the financial advice community, and we invest significantly to support making it easier to do business with us. We don't, we don't foresee, you know, channel conflict, and in many ways, it's not dissimilar to, you know, the personal investment decision around a term deposit that people might make, you know, from time to time.
There's a large part of the population which isn't being served with advice, and there, that's the part of the market where, you know, the marketing that we're doing, will resonate.
Your next question comes from Lafitani Sotiriou with MST Financial. Please go ahead.
Good morning, everyone. Can I follow up with the ROE guidance, and in particular, is it, is it possible to try and isolate the timing, the benefit of the cash rate change? Out of the 4% increase in the cash rate we've seen, how much fell in FY23 as a percentage, how much is falling in FY24, and how much do you have still impact in the following this guidance period, you know, isolating out the organic earnings?
Thanks for the question, Lak. I think the best way to look at the ROE impact, from, from interest rates is really to look at the Life ROE. In seeing the 200 basis point improvement in the Life ROE, that gives you a sense of how, you know, how quickly the cash rate has been able to be reflected. The ROE does represent, you know, the return on the entire book as a whole. Our, our fixed income portfolio has about, you know, just under a 3-year duration. So that's a, that's an indicator of thinking about how long it will take for the entire book to turn over on the, on the fixed income book.
you know, I would say we have seen a material amount of that interest rate come through, but there's definitely some more to come.
I think, Lak, to add to that, we've also just been talking about the property book and the rent roll there, and that's clearly an important part of the income that we receive on the life company balance sheet. We're really focused on, you know, making sure that we're maximizing that. You know, about 72, I think it is, % of the leases we have do have some sort of annual escalator in them, but it's really only a point of redoing the whole lease that you're going to get the complete benefit of the inflation impact that you're seeing in rents across the market corresponding to higher interest rates.
You know, when we talk about it taking time, that's the practical, the, the, the practical impact, you know, from running the balance sheet.
Just can I just be... Because some of the numbers aren't quite adding up, but I think, you know, there's been a lot of questions around this, and so if we just take it, peel it back just one layer. Before interest rates started to move, your pre-tax profit was AUD 472. Now, if you, based on your ROE guidance, if interest rates moving 4% should add AUD 160 million pre-tax profit, and if you add that on, you get to AUD 632 million pre-tax profit just from the interest rate impact based on your guidance, right? Even if you roll that forward by another year, that kind of implies 8% growth just from interest rate impact. It something's missing because you've, you've got securities-...
improving, you've got organic growth, you've got the Life Company as a Funds Management business also set to improve this financial year. It just doesn't quite seem that outside of the interest rate impact piece, that you're getting organic growth or, or the, the numbers just aren't adding up to what you put on the table and put out into the market. I'm, I'm just having trouble trying to understand why the guidance for financial this year is so weak based on the ROE and, and the anticipated timing of the interest rate impacts.
Thanks, Lak. It might, it might be that we take some of this offline with you just to show you the mechanics of the, of the various parts. Part of the issue in comparing year-on-year from a group perspective, is we have had different, you know, different composition to the earnings over time. For the last couple of years, we've had a drag from the Bank from a group perspective, which won't persist, hopefully much into FY 2024. That relative contribution from the FM business has changed over that time, too. We're really confident in the, in the, in the Life ROE expanding as we expect, particularly on the fixed interest, the fixed income side of things.
As Nick said, you know, some of the other components take a little bit longer, but we're very happy to work through that math with you offline.
Yeah, look, I, I understand that, if you look at... The bank's not going to be in your FY24 earnings, right? Something's still not adding up in how you're setting your guidance. It's almost like you're taking the free kick of the interest rate movement and investing it or or setting conservative guidance on what are we missing otherwise? Y-you're barely getting that benefit from interest rates and what you've currently said in the market, what you achieved last year and what you said you'll achieve next year.
I, I think one of the things to think about is that, that interest rate impact, you know, we pass on most of that to our customers through the interest expense. You know, you need to look at both, both the yield side as well as, as well as the interest expense and thinking about the expansion of that product cash margin. That's-
I'm sorry, sorry. Your, your own ROE guidance, you've just reiterated today?
Mm-hmm.
which is, 12%, right?
12.7%.
12.7%.
You're still, you're still confident in achieving that. We should expect this continue to see it come through, and of course, it's showing up already in this, in the net COE spread. What, what's not adding up? Like, because, you should be getting a better impact based on your own guidance. You run the numbers yourself. Even if you roll it out to a third year, you're still not going to get there just from the interest rate impact. What are we missing? Like, I understand there's some timing benefit, but in the past, you've said two-thirds of it tends to come in the first year and a third comes a year after. Now we're kind of hearing that it takes three years to roll through. I mean, which is it?
Like, we're trying to understand your own ROE guidance that you put in the market, and in particular, the cash rate impact and the timing of that. I'm still confused as I was previously, and you don't seem to be able to just clarify the timing and what the key driving factors are.
Yes. I think, let me just start off and then Alex can pick up. I mean, we've seen the benefit of the cash rate expanding through the shareholder funds, but, you know, clearly, not all the whole portfolio is floating rate. We've-- I've just spoken about the other elements and the timeframe will come through, which is not one year after... which is not in the, in the following year, so that will just take time to come through. I must admit, I'm, without looking at the math that you're doing, I'd need to take this offline.
Which I could do.
Okay, all right. The, the clear numbers are, you know, AUD 160 million plus is your own guidance.
Yeah. Well, I mean, just make sure, I mean, we, we want this business to meet its ROE target. We are working extremely hard to drive a better mix of sales in the business coming out of an ultra-low rate environment, where spreads were tight, doing reinvestment activity, repositioning the portfolio. We are very focused on getting this business to its ROE. Alex has noted the drags that we're seeing from the bank that will, will fall out, the lower relative contribution from Funds Management. The Life Company is a business that does well at scale, and the book growth that we're getting, whilst it might not be the double digit that we had last year, is, is of the right shape. You know, the 5% book growth plus that we've seen in FY23 is longer duration business.
If you look at just the... I'm sort of deviating off topic here, but it does all come into, you know, how we position the business to be invested. The investment program is not concentrated around shorter dated liabilities, where the opportunity to earn strong returns is more limited. It's moving out the duration where we can... It's more natural, we can, for us, and we can invest where we can capture the liquidity premium. We are cycling out of this very low-rate environment and remixing the book of business, which will change the investment program to support that over time. It will take time, and the benefit of higher rates was seen through shareholders' funds.
The overall benefit to, from the, from the asset yield side is, as, as I've noted and Alex noted, will just take more time to come through, the book. Which is getting to, to, to someone's question about the lag effect that you get, given the floating rate ROE target, and how quickly we can achieve it.
Thank you.
The next speaker comes from Julian Braganza with Goldman Sachs. Please go ahead.
Good morning, guys. Just an initial question. With the, with the top tier portfolio, just in terms of that, the revaluation, do you still expect to revalue them on a half yearly basis, 50% each half year? Secondly, are you still expecting with your properties for your into FY24? Yeah, just thought we'd ask.
Yeah. Well, let me make a start on that one, Julian. The property allocation we have over the last three years been a net seller of properties. You know, we're not making any, you know, we, we, we're unlikely to be an acquirer at this stage. You will, as the book continues to grow, see the weight, which today is down to 13%. It's down a couple of points over the last few years. That is reducing in the, as a percentage of the overall portfolio. We took the decision, which I, was very prudent, to revalue 100% of the properties externally. Typically, where we only do 50% each half, we then take the external data points and apply that using an internal methodology.
You might- we would have got to the same outcome, but we wanted there to be full transparency on the pricing of those assets. We'll wait and see how transactions move through the course of this year, and we'll make a decision nearer 31 December about whether or not we revalue the whole portfolio or we take, or we go back to policy.
Yeah. No, that, that's right. We're not, we're certainly not changing our internal policy about revaluing them, every, every six months. You know, the intention was to give some, some confidence this time by providing external valuations, although there is a cost to that. You know, I, I, I think it would be more prudent to continue to do it every six months unless we see a lot of movement in the market. If you have a lot of, actually transactions, then that gives the external valuers more data points, in their valuations, and so we would reconsider that. If we do choose to do it again, we'll absolutely let you know.
Okay, thanks. Then in terms of just, just the ROE by, by division, I know you made a comment a little bit with the surprise to meet, to meet ROE targets. I guess put another way, if you're looking at all these new channels that you're looking to develop and, and grow into, particularly to find benefits, and even super and AMC, maybe. Put, put another way, if you had incremental, incremental capital, what, what would be order of priority you would look to grow into first from a capital perspective? Thanks.
Thank you. Well, I'll, I'll, I'll make a comment and then, I'll ask Alex to, to add to it. We're, we're very deliberate right now in focusing on the remix of the life sales. I, there's, there's a number of things you, you'll see in this result is that, you know, where in the past, we've been solely reliant or very heavily reliant on retail for lifetime sales, we're now building our lifetime sales from institutional, from both the significant bulk transactions, the DB buy-ins, plus also the flow partnerships. That is longer dated business, and it is more capital intensive if you want to take that approach from an investment program perspective, and it's where if we, you know, where we can earn higher ROEs on that, on that incremental dollar. That's the focus of our capital right now.
We, we, we continue to invest into Funds Management. Funds Management is capital life business. You know, we, we, we have in this period, and Alex has noted it, you know, had some higher costs through this period coming through and relating to, you know, volumes and the cost of delivering transactions through that part of the business. You know, we're absolutely confident that we will be able to return that business to, you know, to, back to the sort of ROEs that we were earning in the last couple of years in the high 20s over this coming, you know, just over the medium term.
The approach to investing there, we have been investing into the core investment operations platform, which Alex has called out, which is about automating some processes which right now are manual and are regulatory related processes without going into complication. That is a focus. We're putting a bit of cost in to take out costs and operating costs on that side of the business. The incremental capital that we've deployed into some of the new partnerships, a lot of it just builds on our own cost base, things like triple A. With Proterra, we have made, you know, we've made a direct investment into that business of a modest size to take a, to take a stake. You know, right now, we're doing very strong growth in the life company.
That's a priority for, for us to, to support that long-term, you know, that longer dated down book growth that we're achieving. Would you add anything, Alex?
I was just gonna say it's not a, it's not a sort of a binary decision. In terms of that capital allocation, you know, we run a balance sheet, that is diversified and has a mixture of durations, and we match those assets and liabilities to each other. At the moment, what we've talked about is wanting to extend the duration of our liabilities, which is something we, we will look to continue to do, and that enables us to open up the investment universe in terms of the assets that we can invest those in. That comes at a capital intensity cost, and so there, there needs to be an ongoing, an ongoing balance.
Okay, great. Thanks. Then just last question in terms of just the guidance range. I know it was touched on a little bit before, but just the upper end of your guidance range, what will it take for you to get there, and is it largely an outworking of, of book growth expectations that could eventuate over the next 12 months?
Book grow... Well, in terms of setting the guidance range, we've maintained our AUD 50 million, you know, dollar range to give us some flexibility. As we continue to grow, our, our profits, that range becomes a smaller percentage of our overall earnings, as one, as one, observation. The midpoint gets us 11%, and that's on what we know in front of us. As we've said many times, guys, we'll keep the market updated through the year if we think we're going to outperform that, which is what you're asking. You know, clearly, driving higher cash operating earnings in our life company, a better environment, for the funds management business, you know, they're direct inputs into what would take us, take us above that, to the upper end of that range.
Thank you. There are no further questions at this time. I'll now hand back to Mark Chen.
We've received one question online, and I think just because of the time, I'll just ask it, and then we'll finish it up then. The question is just in regards to the product cash margin, whether we can do anything, particularly around pricing, to improve that?
Sure. Thank you for the, the question. Mathematically, absolutely, you know, if we, if we are, if we're tighter on our interest expense, that will drive a higher cash margin. I think what's really important is that we do need to balance the customer proposition. You know, we pass on the benefit of interest rates, if you like, to our customers, and that's a really important part of what we're offering to customers. We will seek at the, at the longer duration sales to be able to get a little bit more benefit on the interest expense. It's, you know, driving those asset yields is, is just as important.
Excellent. There's no further questions. That closes today's briefing. Both Irene and I are on the phones today, should you have any questions. Thanks for your interest in Challenger, and talk soon.